Blog

The family foundation has become a highly popular method for families to engage in charitable giving programs on a collective basis. It is a charitable fund which the family itself generally funds and controls. Another popular estate planning tool is the charitable lead trust. It allows the donor to provide an annuity to charity for a set term of years, after which the remaining trust assets pass to the family at a reduced or no gift tax cost. The desire to marry the two, by having the donor create a charitable lead trust which makes the annual annuity distribution to the donor’s own private foundation, has met with an estate tax roadblock; if the donor retains control of the annuity distributions after their receipt by the family foundation, then the charitable lead trust assets are still includible in the donor’s estate for federal estate tax purposes.

In a recent IRS Private Letter Ruling, one donor created a roadmap for how to set up a charitable lead trust for the family foundation without creating an estate tax problem.

The foundation’s bylaws provided that any director who is also a grantor of a charitable lead trust of which the foundation was the beneficiary could not vote for the appointment of a director if the individual being so appointed was related or subordinate to that grantor within the meaning of the Internal Revenue Code. The bylaws also prohibited any director who is also a grantor of a charitable lead trust of which the foundation was a beneficiary from voting on any matters related to funds received from that charitable lead trust, such as voting on disbursements or grants to be made payable from such funds. The funds received from the charitable lead trust were also required to be held in a separate account by the foundation.

With all the safeguards built into the foundation’s bylaws, the IRS ruled favorably that charitable lead trust assets would not be includible in the donor’s estate for federal estate tax purposes.

You, too, can set up a charitable lead trust to fund your family foundation. The recent ruling is consistent with several previously granted by the IRS, so this seems to be a safe method for marrying the charitable lead trust with the family foundation.

John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...